About the author

Mark J. Perry is concurrently a scholar at AEI and a professor of economics and finance at the University of Michigan's Flint campus. He is best known as the creator and editor of the popular economics blog Carpe Diem. At AEI, Perry writes about economic and financial issues for American.com and the AEIdeas blog.

In 2011, the oil and gas industry contributed more than $1.1 trillion towards US GDP of about $15 trillion in that year, according to the PwC report. That represents 7.3% of the total economic output of the U.S. economy in 2011, and comes from $481 billion in direct impact (jobs, income and value added within the industry), $494 billion in indirect impact (jobs, income and value added throughout the supply chain of the oil and gas industry) and $126 billion in induced impact (jobs, income and value added from household spending of the income earned directly or indirectly from the industry’s spending).

The chart above helps to put the size of America’s oil and natural gas industry into perspective. If the US oil and gas industry was considered as a separate national economy, it would have ranked as the world’s 16th largest economy with “GDP” in 2011 of $1.1 trillion, with just slightly less economic output as the entire national economies of South Korea ($1.11 trillion in GDP) and Mexico ($1.15 trillion in GDP), and not too far behind the GDP of Australia and Spain, based on World Bank data.

Here’s another way to put America’s enormous energy sector into perspective:

Q: Which is larger, America’s oil and gas industry, or the entire national economy of Saudi Arabia?

A. Even with the world’s largest reserves of crude oil and current production of more than 11 million barrels of oil per day, the output of Saudi Arabia’s entire economy at $580 billion in GDP in 2011 was only about half of the size of America’s oil and gas industry at $1.1 trillion.

The PwC report also estimates that the oil and gas industry supports more than 9.6 million jobs in the US economy, with about 2.6 million Americans working directly in the industry, and nearly 7 million additional jobs supported throughout the economy from the indirect and induced effects of the energy industry.

Bottom Line: America’s oil and gas industry is enormous, as is its impact on the US economy. And the positive impact of the oil and gas industry gets stronger all the time, as domestic energy output increases – North Dakota is producing record amounts of oil, Texas oil output has doubled in just the last three years to the highest level since 1987 (Eagle Ford Shale in Texas now ranks as the largest single oil and gas development in the world based on capital expenditures) and the US has probably just surpassed 7 million barrels per day in domestic oil production for the first time in more than 20 years. Domestic natural gas production reached a record high last year, bringing prices down to record low levels and rolling the carbon clock back by several decades. With all of the increased domestic production of oil and gas, the US was more energy self-sufficient in 2012 than in 20 years – we produced more than 83% of the total energy consumed last year (based on data for the first nine months) for the first time since 1991.

When we consider that the economic impact of America’s oil and natural gas industry is like adding the entire economic output of Mexico or South Korea to the US economy, it helps us understand and appreciate the enormous contribution and value of that one industry to our economy. With sensible tax and regulatory policies, and increased access to our nation’s vast energy treasures, there’s no reason why the US oil and gas industry won’t continue to expand and increase its economic footprint. Let’s hope that the economic output of the US oil and gas industry will one day surpass the GDP of economies like South Korea, Mexico and Australia. Or even Spain or Canada.

Discussion: (24 comments)

Yes, the US energy industry is huge. In fact it was the Seven Sisters that created much of the global energy industry that we see today and five of them were American corporations. And yes, shale gas production has exploded. But that does not mean that shale gas is economic or will ever be economic outside of a few core areas. In this case the cash flows and balance sheets have shown that the shale hype is unwarranted and we have already seen some of the larger players begin to write down the overvalued assets from their balance sheets. This does not mean that the US is not a huge player because it is. But we have to call it as we see it and the shale bubble is just as real as the IT and housing bubbles were before it.

But when you look deeply you also see how much it is based on smoke and mirrors. Since the 1980s the share of the economy that has been taken up by government and the financial sector has grown to unsustainable levels. Both the bankers and the government workers are now in big trouble and many of the jobs that depended on their continued health are about to disappear.

The point remains the same, Vangel. Let’s assume that half of the $1.1 trillion is smoke and mirrors. That only knocks it down five places, to 21.

But the last time I looked outstanding financial instruments dwarfed the entire US economy by several thousand percent. There are bets out there that can go bad. When they do, the entire system, which is dependent on increased credit availability begins to contract and when that happens much of the ‘economy’ vanishes. I know that Keynesians have a hard time with this but the monetary system matters in the end. Since the US system is now entirely dependent on the creation of purchasing power out of thin air there will have to be a day of reckoning when you see an outright default and the issuance of a new monetary unit. At that time American wealth creation will depend on the capital that has been accumulating during the past few decades. But as I look around I see capital destruction running ahead of capital formation. That makes me worried about what happens when the banks can no longer keep playing their games of deceit and I suspect that the US will go the way of Japan and Spain. Which may be why the Chinese are quietly using their reserves to acquire assets and purchase commodities that will have some value after the next crash takes out many of the currencies that were considered ‘safe’ not that long ago.

Ok, let’s pretend that half of the US GDP is make believe. That still makes us the world’s largest economy.

The US economy is massive.

Yes it is. But what you are missing is the fact that many of the activities that are added to GDP are wealth destroying. After all, we just saw that you spend more than $1 trillion on defense related programs that make the nation poorer. For example, you spend more on VA and non veteran pensions and benefits than China does on its entire military. And most of what China spends on its military can be funded by interest payments that the Treasury makes to it for holding all that worthless paper.

The Basel negotiations revealed the fiction that is the financial system’s balance sheets and once you choose to properly account for the crap that is on balance sheets you will find that the real GDP is much smaller than you imagine.

Do not assume that I am saying that the US is weak or economically unimportant because it isn’t. My point is that without capital formation most of what is reported is fiction that has no bearing on future wealth creation. To understand my argument you need to be familiar with the ABCT, but it is clear that you reject such a view and prefer to go with the Keynesian and neo-Keynesian approaches.

The biggest shale deposit in the U.S. has barely even started production. The Monteray Formation in California could propel that state to one of the top five economies in the world, if it doesn’t ruin its business environment any further.

In fiscal year 2011, the federal government spent $3.6 trillion, amounting to 24 percent of the nation’s Gross Domestic Product (GDP).

20 percent of the budget, or $718 billion, paid for defense and security-related international activities.

Another 20 percent of the budget, or $731 billion, paid for Social Security.

Medicare, Medicaid, and the Children’s Health Insurance Program (CHIP) – together accounted for 21 percent of the budget in 2011, or $769 billion.

Safety net programs: About 13 percent of the federal budget in 2011, or $466 billion, went to support programs that provide aid (other than health insurance or Social Security benefits) to individuals and families facing hardship.

Interest on the national debt: Claimed $230 billion, or about 6 percent of the budget.

The remaining fifth of federal spending…include providing health care and other benefits to veterans and retirement benefits to retired federal employees, assuring safe food and drugs, protecting the environment, and investing in education, scientific and medical research, and basic infrastructure such as roads, bridges, and airports…programs that operate internationally, including programs that provide humanitarian aid.

20 percent of the budget, or $718 billion, paid for defense and security-related international activities.

That is not true. The number is actually much higher than that.

We begin with the base budget for the Pentagon, which is around $530 billion.

Add the war funding, which is not included and you are getting to around $620 billion. (The wars will cost somewhere about $88 billion and we add a billion or two for State that will be related to the wars but not counted as war related.)

Add around $50 billion for direct DHS and DHS related funding hidden among other departments and we get to $670 billion.

Add around $18-$20 billion for the nukes and nuclear related spending at DOE and other agencies and you are up to $690.

Let us not forget the international affairs budget, which funds military spending by other nations, ‘peacekeeping’ operations, funds security assistance, and other defense related activities. Add that up and you are looking at $715 billion.

Add close to $140 billion for the VA and you are now looking at $855 billion. Add the Pentagon’s civilian employee pension and benefits and you are now near $910 billion.

Add $8 billion for a miscellaneous defense account that is being kept separate from the defense base budget and we are at $918 billion.

What about the CIA and its drone program? We are probably looking at close to $50 billion on that front. That brings us to $968. And let us not forget NASA’s military contracts, which run another $8-$10 billion or so. Add the interest payments on debts left over from all of the wars that the US has been involved in and you are well over $1 trillion. That is a huge number and close to half the actual tax revenues that will come in for the year and around the size of Iran’s entire economy.

I’m not sure we’ll ever know our total defense spending – I think the real number would make peoples heads explode. Germany just revealed laser technology that enables them to down drones at over a mile’s distance; that’ll spur another round of frantic U.S. defense spending no doubt…

I’m not sure we’ll ever know our total defense spending – I think the real number would make peoples heads explode. Germany just revealed laser technology that enables them to down drones at over a mile’s distance; that’ll spur another round of frantic U.S. defense spending no doubt…

As Buffett says, you don’t have to know how much a man weighs to see that he is obese. The fact that we stopped counting near $1 trillion without looking at the cost of NSA, FBI special counterterrorism operations, etc., shows just how pathetic the GOP is when it claims that no cuts are possible without weakening the country. Not only are they possible but if they take place along with certain policy choices the US could be safer while it spends a fraction of what it does today.

“Add the war funding to around … Add around $50 billion … Add around $18-$20 billion … Let us not forget the international affairs budget … Add close to $140 billion … Add $8 billion for a miscellaneous … We are probably looking at close to $50 billion on that front …” — Vag

As long as you’re making shit up and pulling numbers out of your ass, why not go really big? Why not $2 Trillion a year? Or, $3 Trillion? Remember what that other sad, lefty puke, Adolph Hitler, said, ““If you tell a big enough lie and tell it frequently enough, it will be believed.”. Well, you and your ilk have certainly taken that advice to heart.

As long as you’re making shit up and pulling numbers out of your ass, why not go really big? Why not $2 Trillion a year? Or, $3 Trillion? Remember what that other sad, lefty puke, Adolph Hitler, said, ““If you tell a big enough lie and tell it frequently enough, it will be believed.”. Well, you and your ilk have certainly taken that advice to heart.

The numbers come from the CBO, White House, Defense, State, etc. Nothing is made up and there have been a number of articles on just this topic over the years.

Tell you what; you find an item that you disagree with and we will look for it in the budget or published literature where no budget transparency exists.

Yes, the Department of Education should be abolished. But so should many of the military related programs because almost every dollar taken in as income tax revenue is wasted by the American military apparatus. Taxpayers are certainly concerned even though the GOP and Democrats seem not to have noticed.

You mean to tell me that you can’t find the CBO site, which will give you the Pentagon budget, the VA costs, etc.,? Not only was I able to find all of the numbers I cited I even wound up with an xls file that broke out most costs in pretty good detail. Which number did you have a problem with? You tell me and we can look at it by finding a reference to it.

But since people are either unable or unwilling to search for the detailed numbers let me provide links to analysis of the issue. As I said, this has not been exactly a secret.

Note the last reference? The authors stopped at $931 billion without looking at the interest on the war debt accrued throughout US history, the entire intelligence budget, NASA’s related Pentagon costs, etc.

One last thing; income tax revenues came to just under $1.2 trillion during the analysis period. That meant that almost all of the income tax taken in by the government was spent on America’s foreign entanglements and defense programs. Not exactly a sign of a healthy economy if you ask me.